Obamacare funding: Taxes will help pay for new health care law

The Affordable Care Act is expected to raise hundreds of billions of dollars in tax revenue over the next 10 years. But most people won’t see this money coming out of their pockets, at least not directly.

To pay for the health care law, Congress created a number of new taxes or raised existing rates on individuals and industries. For individuals, the new rates target mainly high-income households and those who ignore the requirement that they have health insurance.

One of the new taxes that accountants say they are most concerned about is the increase on the tax rate of investment income, such as earnings from capital gains, rental properties, taxable annuities and the like. Individuals whose taxable income is more than $200,000, or married joint filers whose taxable income exceeds $250,000, face a 3.8 percent jump in the tax rate next year.

This change affects a small segment of New Jersey. Of the nearly 3.4 million federal tax filers in the state who reported taxable income on their 2011 returns, about 242,000, or about 7 percent, had a taxable income of $200,000 or more, according to Internal Revenue Service data.

As a result, accountants say they’ve focused much of their energies this year around this tax hike.

“That’s what most of our planning this year has been on: how to avoid that,” said Kenneth Hydock, an accountant with Sobel & Co., in Livingston. Strategies include shifting portfolios to include more tax-free municipal bonds or selling investments that have incurred losses over the years.

High-earners already feel the pinch of the health care law’s other main tax on them. Those whose wages and compensation exceed $200,000 a year, or married joint filers earning more than $250,000, have been subject to a 0.9â percent jump in their Medicare payroll taxes this year.

This is an area of the law that’s also affecting many small-business owners, noted Joseph Graff, managing partner of Ross, Rosenthal & Co., an accounting firm in Morristown. That’s because the payroll tax bump also applies to self-employment income.

Most people, however, won’t notice the law’s tax impact until they file their federal returns in 2015. That’s when the IRS can withhold money from people who didn’t comply with the individual mandate to have health coverage.

With few exceptions, those who don’t have coverage in 2014 face a tax of $95 or 1 percent of their taxable income, whichever is higher. The tax goes up depending on how many people are uninsured in their household. And it will rise over the years to $695 a person, or 2.5 percent of their income, for the 2016 tax year. The IRS can only withhold money from your tax return. It has no ability to send you a bill or garnish your wages the way it could if you failed to pay income taxes. If you don’t receive a tax return, the IRS cannot penalize you.

Moving forward, people need to be mindful of how sudden changes in wealth will impact them at tax time. Major gains from home sales, particularly of vacation or secondary homes, could push people into the higher tax bracket for net investment income.

“Somebody who might not feel very wealthy could find themselves in this situation,” Graff of Ross, Rosenthal said.

The Affordable Care Act raises hundreds of billions in taxes to help pay for the law.Heritage Foundation

Another area that demands consideration is how changes to one’s income or household size will affect any federal subsidy he or she gets to buy health insurance, said Brian Haile, senior vice president of health care policy at Jackson Hewitt Tax Services.

Those whose household income is at 400 percent or less of the federal poverty level may be eligible for a subsidy to buy insurance from the marketplace exchange opening in New Jersey on Tuesday. The government can either make the payment directly to the insurance company or provide a credit to you on the following year’s tax returns.

The danger, however, is if someone goes over that 400â percent mark, thanks to an unexpected raise or bonus. If they do, Haile said, they will be required to pay back every dollar the federal government spent toward their premiums.

“That is a pretty serious cliff that you don’t want to be on the wrong side of.”